Medical costs push up consumer prices

WASHINGTON (Reuters) - U.S. consumer prices rose more than expected in January despite a dip in energy prices, as medical costs jumped, according to a government report on Wednesday that led financial markets to trim bets of interest rate cuts.

Consumer prices rose 0.2 percent, while core prices, which exclude food and energy costs, climbed 0.3 percent, the Labor Department said.

Analysts were expecting overall consumer prices to inch up 0.1 percent and for core prices to rise by 0.2 percent.

The higher-than-expected Consumer Price Index numbers diminished market expectations the Federal Reserve would lower interest rates more than once in 2007.

U.S. Treasury debt prices and stocks fell while the dollar rose. U.S. interest rate futures pared bets on a third-quarter rate cut by the Fed to 50 percent from 70 percent before the price report.

"This adds credibility to Fed Chairman Ben Bernanke in his monetary report to Congress last week that inflation remains a concern," said Richard DeKaser, chief economist for National City Corp. in Cleveland.

Energy costs slid 1.5 percent, partly reversing a 4.2 percent gain in December.

But medical costs rose 0.8 percent, the steepest increase since a matching 0.8 percent gain in August 1991. The rise in medical costs was responsible for 60 percent of the gain in core prices, the Labor Department said.

In addition, food costs grew 0.7 percent, the biggest increase since April 2005.

Consumer prices rose 2.1 percent from January a year ago, while core prices rose 2.7 percent over the same 12-month period. Analysts were expecting overall consumer prices to rise 2.0 percent from January a year ago and for core prices to rise 2.6 percent.

Bernanke told Congress last week he expects inflation to moderate from what the Fed considers elevated levels. He said the Fed's current target for benchmark overnight rates, 5.25 percent, should suffice to pull inflation lower, but said policy-makers stand ready to raise interest rates to tamp down any inflation pressures if necessary.

Some analysts took the consumer price data with a grain of salt, noting that a 3.1 percent jump in tobacco prices may have boosted core prices, while a measure of home-ownership costs was benign.

Owner's equivalent rent, a proxy measure for the cost of owning a home, gained a modest 0.2 percent, the smallest rise since January 2006, well less than worrisome increases in the middle of last year. The housing cost component makes up almost a quarter of the price index.

"Overall, big picture still improving," High Frequency Economics' Ian Shepherdson said of the price report.

Other data pointed to a moderation in U.S. growth.

A key forecasting gauge for the economy rose for the second straight month, but at a smaller-than-expected 0.1 percent in January.

The rise in the U.S. Composite Index of Leading Economic Indicators was short of market expectations for a 0.2 percent gain and followed a sharp, upwardly revised 0.6 percent gain in December, the private Conference Board said.

In another report, U.S. mortgage applications dropped more than 5 percent last week, hitting their lowest level this year, even as interest rates fell, an industry trade group said.

Meanwhile, U.S. chain store sales fell 0.1 percent in the week of February 17 after a 0.8 percent decrease in the prior week, according to a report by the International Council of Shopping Centers and UBS Securities.

A report by Redbook Research showed chain store sales fell 1.2 percent in February-to-date compared with January.

(With additional reporting by Julie Haviv in New York and Nancy Waitz in Washington)